Investment and Development Impact of Microfinance Institutions: A case study of Ghana

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BLEKINGE INSTITUTE OF TECHNOLOGY

Master Thesis MBA Program

INVESTMENT AND DEVELOPMENT IMPACT OF MICROFINANCE INSTITUTIONS: A CASE STUDY OF

GHANA

Authors:

Yaw Francis Eduonu Duah (31.03.1977) Eleanor Neequaye (02.08.1981) Emmanuel Annan Kissiedu (15.09.1975)

Supervisor:

Shogo Mlozi (PhD)

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Abstract

This study with its two-fold objectives undertakes a descriptive analysis of how Microfinance Institutions (MFIs) have evolved into its multi-tiered state in Ghana and how their development has impacted other stakeholders in Ghana’s economy especially Micro and Small-Scale Enterprises (MSEs). Additionally, this study undertakes an empirical and exploratory case study to investigate how MFIs in Ghana are influencing access to finance by MSEs. Given that MFIs and MSEs impact large swaths of very poor households, contribute fairly to the GDP of their countries, possess the potential to lift poor household above the poverty line, absorb the ramifications of economic recessions and fiscal adjustments, and provide employment and welfare; they constitute a potent investment and developmental tool for the attainment of the Millennium Development Goals (MDGs) and national development programmes in developing countries. The study shows how Ghana’s MFI sector has evolved through years of regulatory reform into a multi- tiered microfinance framework to fill the financial chasm and disparity. It is also shown that the main financial and banking institutions are extending their depth of coverage to poor households through partnership with MFIs. Semi- structured questionnaires were administered to a random sample of 25 MFIs and 25 MSEs. The questionnaires qualitatively measured and assessed among others the firm characteristics, access and use of capital, the use of savings accounts, the impact of business loans, loan policy and procedures, marketing strategy, customer evaluations, business motivation, business challenges and loan repayment. Deposit Money Banks (DMBs) serve only about 5% of Ghanaian households. 70% of households are reported to have members without a savings account. The main source of household credit and loans is relatives, friends and neighbours. Findings from the study indicate the main source of start-up capital for both MFIs and MSEs are personal savings, followed by the use of business loans. MFIs are the main source of business loans for MSEs. MSEs are confronted with lengthy loan processing and approvals times of up to 3 months and are required to provide collateral for loans. The main types of loan collaterals are physical assets and savings with the MFI. The latter being a contributory factor to the lengthy loan processing and approval time. MFIs offer MSEs very flexible payment terms and are easily accessible to MSEs, which are the key decision factors for MSEs in deciding an institution for loan application. MSEs hold favourable views of MFIs and the kind of financial services MFIs offer them. MSEs used business loans mostly in business growth and expansion. MSEs indicated business loans from MFIs had overall positive impact on their revenues, profits and their overall business activities.

MSEs highlighted access to loans as their main business challenge. Loans offered by MFIs are tailored to meet their specific needs – fixed interest rates, short maturity (3-6months) and flexible payment terms. The main business challenges for MFIs are customer loan defaults and competition. The study has shown that MFIs are increasing their momentum to harness the investment and developmental opportunities that limited or lack of access to financial services and products presents, which this study has shown to be the driving force behind the growth and expansion of MSEs and with a culminated impact on Ghana’s economy.

Key Words: Microfinance, Micro Finance Institutions, Micro and Small-Scale Enterprise, Investment,

Development, Poverty.

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Acknowledgements

We wish to express our sincere appreciation to the Almighty God the opportunity and strength granted to us to bring this thesis to a successful end.

Our appreciation goes to the supervisor Dr. Shogo Mlozi who did not only patiently direct us but painstakingly read through this paper and made useful criticisms and suggestions. We also want to acknowledge our course instructor Prof. Ossi Pesamaa whose effort and commitment brought encouragement to work within the set time. We extend our appreciation to all the course instructors at the school especially Katrin Franander the new programme assistance whose effort ensured a smooth teamwork during the early stages of this thesis.

Our appreciation goes to the team who supported through the data gathering stages whose relentless effort made the data gathering reality.

We salute all the various organisations who provided data – The Ghana Cooperative Credit Unions

Association (CUA), Ghana Co-operative Susu Collectors Association (GCSCA), and The Association of

Microfinance Companies (GAMC), the Bank of Ghana (BOG), the Ghana Statistical Service (GSS) and all

the survey respondents whose names time and space will not permit us to mention, but helped to volunteer

information for the successful conclusion of this work. We acknowledge all who have helped in diverse

ways to help make this dream a reality. We say God bless you all.

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Dedications

Yaw Francis Eduonu Duah

I thank God Almighty for the wisdom, strength and His Grace that saw me through this research. I dedicate this work to my dear wife, love of my life and best friend – Jennifer Abena A. Duah and the best and coolest children in the whole world – Nana Efua O. Duah and Abeku Oheneba E. Duah; who have supported me every step of the way and have sacrificed so much to enable me complete this MBA programme.

It is the glory of God to conceal a thing: but the honour of kings is to search out a matter (Proverbs 25:1, The Holy Bible - King James Version): King Solomon (Israel - 970 to 931 BC)

Eleanor Neequaye

I am most grateful to God for His abundant grace, wisdom, guidance and sustenance throughout this work. I appreciate all my lecturers and programme assistant at Blekinge Institute of Technology.

I am appreciative of the prayers, love, moral, financial and material support I received from my family. I also express my sincerest gratitude to my co-authors and all friends who willingly spared their time and wisdom to see this work to fruition.

Emmanuel Annan Kissiedu

I thank and praise God my maker for His grace, strength and wisdom through these tough times. I specially

dedicate this work to my wife and soul mate Juliette Annan Kissiedu, for her support, patience and

encouragement through this MBA programme. To my lovely kids Emerald Kofi Boateng Kissiedu and

Emily Addobea Appeah Kissiedu for their patience and understanding, when I needed the laptop to do

assignments at a time they are watching their favourite cartoon CDs. At times, they wanted to play with

daddy when daddy was very busy with assignments especially during weekends.

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Abbreviations

ARB Association of Rural Banks ASSFIN Association of Financial Non-

Governmental Organisations BOG Bank of Ghana

CGAP Consultative Group to Assist the Poor

CIDA Canadian International

Development Agency

CU Credit Union

CUA Ghana Co-operative Credit Unions Association

DMB Deposit Money Bank

EC European Commission

FH Finance House

FNGO Financial Non-Governmental Organisation

GAMC Ghana Association of

Microfinance Companies GCSCA Ghana Co-operative Susu

Collectors’ Association GDP Gross Domestic Product GH¢ Ghana cedi (Ghana currency)

GHAMFIN Ghana Microfinance

Institutions Network

IDA International Development Association

IMF International Monetary Fund

IMFI Informal Microfinance

Institution

IMLE Individual Money Lender and Enterprise

ISC Individual Susu Collector ISCE Individual Susu Collectors

and Enterprise

MASLOC Microfinance and Small Loans Centre

MDG Millennium Development

Goals

MDRI Multilateral Debt Relief Initiative

MFI Microfinance Institution

MIX Microfinance Information Exchange ML Money Lender

MLAG Money Lenders Association of Ghana MSE Micro and Small-scale Enterprise

MSME Micro, Small and Medium-scale Enterprise NPA National Petroleum Authority (Ghana) PNDC Provisional National Defence Council RMFI Rural and microfinance institutions SC Susu company

SHG Self-help Group

SLC Savings and Loans Company SLCs Savings and Loans Company SME Small and Medium-scale Enterprise

SSA Sub-Saharan Africa

TUC Trade Unions Congress (Ghana)

UN United Nations

UNCDF United Nation Capital Development Fund UNFPA United Nations Populations Fund

UNICEF United Nations Children Fund

USAID United States Agency for International Development

WCED World Commission on Environment and

Development

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6 Periodicity, Monthly Loan Interest, and Loan Conditionality Perception ... 61 Table 26: MSE Use of Acquired Loan, Use of Savings Accounts: Possession of Savings Accounts, and Type of Savings Account ... 62 Table 27: Savings Deposits Frequency, Monthly Savings Amount, and Purpose of Savings Account... 63 Table 28: MSE Business Loan Impact - Overall Impact on business, Impact on Revenue, Impact on Profit, and

Institutions from MSEs would take a loan again from ... 64

Table 29: Reason for choice of institution for repeat loans, Benefits of the business Loan, Loan Default and Business

Challenges ... 64

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CHAPTER 1 INTRODUCTION

1.1 Microfinance, Poverty Reduction and Development

This study explores the impacts, benefits and challenges of microfinance institutions (MFIs) in generating investment opportunities for individuals, and micro and small-scale enterprises (MSEs) in support of the Ghana’s economic developmental drive and initiatives. With economic growth and macroeconomic stability as the engine to drive Ghana’s developmental objectives, which focused in part on poverty reduction and alleviation, the role of microfinance institutions (MFIs) as a contributory developmental tool becomes imperative. The ability of MFIs to reach large swaths of the poor population makes it a suitable tool for poverty reduction among the poor (Robinson, 2001). Microfinance is the provision of a range of financial services comprising loans, savings, insurance and payment services to low economic or poor people who lack or have limited access to formal financial service institutions and providers due to their perceived risk, low balances and high transaction costs (Visser et al., 2008). MFIs are an integral part of the global financial sector providing varying services targeted at the financial, commercial, social and developmental needs of a broader clientele including the poor. During the last 15 years, microfinance has emerged as an important tool for poverty alleviation due in part to the inability of licensed banks and financial institutions to reaching greater portion of the population especially in developing countries. These institutions typically serve 5 to 20% of the population(Gallardo et al., 2005).

Efforts by governments in developing countries and their supporting donor organisations in 1950-70s in poverty reduction, focused on experimentation with agricultural subsidies and microcredit to small and low- income farmers to increase productivity and income levels. The viability and sustainability of such initiatives have been criticised due to its limited focus on social needs (Yuenger, 2009). The pioneering work with microcredit in 1976 by Nobel laureate Professor Mohammed Yunus, the founder of Grammen Bank, served as an example of a shift from government subsidies to microcredit for low-income poor in Bangladesh. As of October 2011, Grammen Bank was owned by 95% of it borrowers, mostly poor, and the remaining 5% owned by the Government of Bangladesh. Grammen Bank has 2,565 branches with access to 81,379 villages and total staff of 22,124. There are 8.35 million borrowers of which96% are women with a total of US$11.35 billion loan disbursement since its inception and a loan recovery rate of 97% (Grammen Bank, 2011). The success of the Grammen Microfinance Model showed the microfinance is viable, sustainable and can help poor people transform their lives and households.

The first institutional form of microfinance in Ghana and Africa was a credit union created by an Irish Canadian missionary Rev. Father John McNulty at Jirapa in the Upper West Region of Ghana in September 1955 in the form of a self-help group (SHG)(CUA, 2012). The SHGs transition into another pervasive form of semi and informal micro-financial system in Ghana and the West African sub-region termed Susu in Ghana.

Susu is a system of daily or weekly savings mobilization serving mostly petty traders, artisans, low-income households, and micro and small-scale enterprises (MSEs) which is thought to have originated in the 16

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century from among the Yorubas of Nigeria and spread to the Caribbean through slavery and to other parts of West Africa in the past half-century (Seibel, 2001).Susu in Ghana has transitioned to a semi-informal institutional system with an overarching organisation called the Ghana Co-operative Susu Collectors’

Association (GCSCA) with a mandate from the Bank of Ghana to monitor and regulate Susu operators in the

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14 country. Susu is synonymous to microfinance in Ghana due to its grass-roots nature, long tradition and its ability to dealing Ghana’s poor through the centuries. According to the 2005 Ghana Living Standards Survey (GLSS5) involving 8687 households with 37,128 household members, 70% of households reported having members without a savings account. 27% of household indicated have loans or suppliers credit (trader) from individuals, businesses or institutions with 6% having paid their loans in full in preceding 12 months. The main source of household credit and loans is relatives, friends and neighbours (53%), followed by supplier credit (trader) (15%) and state and private banks (15%) with remaining 17% coming from cooperatives, government agencies, NGOs, businesses, employers, money lenders and others. In parallel with the growing recognition of microfinance as a developmental tool for the poverty alleviation, is the recognition of the role of MSEs in developing economies. The potential of MSEs as a tool in the drive towards economic development, poverty reduction and achievement of the MDGs are well documented (World Bank, 1996;

Daniels and Mead, 1998; Mead and Liedholm, 1998; Cook and Nixson, 2000; DFID 2000; Green et al., 2002;

Daniels, 2003; and Green et al., 2006).

1.2 Statement of Research Problem

Home to 821.3 million people in 2011(UNFPA, 2011), Sub-Saharan Africa (SSA) has experienced a marked accelerated growth of over 5% real Gross Domestic Product (GDP) since the mid-1990s and is projected to have a 2012 economic growth rate of 5.8 %( IMF, 2011). The macroeconomic stability and economic growth has fostered increased investor interest in microfinance with the resultant rapid rise of greenfield (new entry) MFIs and existing institutions becoming more efficient and profit-oriented. A paradox to the economic growth of the SSA sub-region is the apparent disconnect between its recent economic gains and poverty reduction;

though improvements has been made in social and health issues. The poverty headcount ratio at $1.25 a day (purchasing-power parity [PPP]) for SSA declined slightly from 59%in 1996 and 51% in 2005(IMF, 2011).

This underscores a weak elasticity in the translation of the growth momentum, investment and developmental resources to SSA’s MFIs who deal directly with the population below the poverty line. This week elasticity can be strengthened by stronger, viable, profitable and sustainable MFIs delivering increased finance access to poor household and their micro to small enterprises. Challenges faced by MFIs in SSA is characterized by falling returns on assets, highest operating costs in the world and a steady rise in the number of portfolio-at- risk (MIX and CGAP, 2011). Daniels and Mead (1998) note MSEs make significant contributions to poverty alleviation and welfare since their activities have direct impact on large numbers of very poor people with limited better alternatives, but their effort are insufficient to move household above the poverty divide as a result of their low returns.

Given that MFIs and MSEs impact large swaths of very poor households, contribute fairly to the GDP of their countries, possess the potential to lift poor household holds above the poverty line, absorb the ramifications of economic recessions and fiscal adjustments, and provide employment and welfare; it is not out of place to assume they are a potent investment and developmental tool for the attainment of the MDGs and national development programmes in developing countries. In spite of the on-going debate of the role of micro and small institutions and enterprises, the potency of MSEs as a developmental tool can be increased several fold when combined with the financial resourcefulness of MFIs. The constraints to the development of MSEs include high input costs, access to finance, insufficient skilled labour, access to appropriate equipment and technology, demand constraints, regulatory constraints, lack of managerial skills, institutional constraints, heavy competition (Aryeetey et al., 1994; Parker et al., 1995; Cook and Nixson, 2000; Kayanula and Quartey, 2000; J. Alabi et al., 2007; Abor and Quartey, 2010). Of the many constraints challenging micro and small- scale enterprises (MSEs) development, Green et al. (2002) opine finance is the most critical. Parker et al.

(1995) found out the level of concern for access to finance as a primary concern varied from country to

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15 country. MSEs’ sources of finance for investment, working capital, equipment and raw materials purchase has predominantly being from personal savings and loans from family and friends; with studies indicating under 10% of MSEs in African countries use loans from bank and financial institutions. Other important sources of finance for MSEs include suppliers’ credit, customers’ advance, enterprise profits and reserves and MFIs (Aryeetey et al. 1994; Parker et al. 1995; Cook and Nixson 2000; Green et al. 2002). Research interests in microfinance issues have peaked in Ghana as researchers try to explore and understand the real impact on the Ghana’s poor and economy and as a tool for development. There has been research into this but with emphasis on the various government interventions, which were mostly seen as failure. Others have also tried to answer the question of the impact microfinance make on the life of the recipients especially women and children and sought to trace the origin of microcredit and the impact it has made on the various beneficiaries so far and how government can explore the field to bring growth and advancement into the life of the economically poor.

These researchers however have failed to address private sector investment into microfinance especially by individuals and how their investment can impact the economy as a whole through the provision of microloans to MSEs.

Access to credit can assist MSEs to employ and pay skilled workers; for restructuring and expansion, which could culminate in high levels of profitability and household income with the ultimate promotion of household above the poverty line. In viewing access to credit from a supply and demand perspective, MFIs and MSEs are compelled by their mutual challenges of exclusion from their main sub-sectors, to address the polar ends of the credit-access problem. MSEs can translate microloans from MFIs into powerful channels for their transformation into profitable and success enterprises that form the economic building blocks of many developing countries. Access to credit by MSEs at reasonable rates and costs is therefore vital for their development and ability to help many dependent poor households. Synergies and economies of scale can be gain by MFIs and MSEs as a result of their operational areas encompassing the informal banking, financial, commercial, industrial and manufacturing sectors. It is this mutual interaction between the MFIs and MSEs that this study explores to understand how MFIs have evolved through time to its current state and how the recent stages of its development has impacted other stakeholders in Ghana economy. We further investigate via empirical study the MFI-MSE interaction in harnessing the critical role of finance for their mutual development. This study is in line with calls to address the research gap pertaining to MFI-MSE interaction in developing countries. According to Cook and Nixson (2000), several research have been carried to study the characteristics and behaviour of MSEs but there are still knowledge and research gaps in the relation between finance (access to credit) and its impact on the development of MSE development especially in developing countries.

1.2 Research Objective

The specific objectives of the case study are:

a. To examine the genesis and the development of microfinance institutions and operations in Ghana from independence to present.

b. To assess how the evolution of regulatory frameworks have impacted the development of MFIs in Ghana.

c. To determine possible impacts, benefits and challenges of microfinance operations in generating

investment opportunities for individuals, and micro and small-scale enterprises (MSEs) for Ghana’s

economic developmental drive and initiatives.

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16 d. To examine the effect of the development of microfinance in Ghana on the other stake holders in the

banking and finance sectors and its overarching impact on Ghana’s economic development.

1.4 Research Question

The questions to be addressed in this study are;

1. What has been the evolutionary development of the MFIs in Ghana and what has been their developmental impact on other stakeholders in the Ghana’s economy?

2. What investment and developmental opportunities do MFIs in Ghana create to influence access to finance by MSEs?

1.5 Key Definitions 1.5.1 Definition of Development

There are varied definitions of development based on different contexts but majority focused on economic growth in past periods with the later inclusion of social, environment and sustainability dimensions. The World Commission on Economic and Development’s(WCED, 1987)definition of development; ‘…meeting the needs of the present without compromising the ability of future generations to meet their own need’

provided a foundation for understanding the complexities, interactions and the contextual prerequisites required for its attainment through policies, programmes and projects. In 2000, the adaption and enactment of the United Nations’ Millennium Development Goals (MDGs) with globally accepted measurable targets and deadlines provided clarity and direction for concentrated global effort to help the world’s poor. Sustainable economic development requires steady and continuous investment in a country’s economy. For the world’s 1.4 billion living under $1.25 a day as of 2005(UN, 2011), the development strategies driven by governments, multinational organisations and grass-roots non-governmental organisations (NGOs) will require direct access to investments and finance by the world’s poor. Littlefield et al. (2003), Simanowitz and Brody (2004) and UNCDF (2005) assert the critical importance of microfinance for the attainment of MDGs. An extensive literature review by Morduch and Haley (2002) allude to the effectiveness of microfinance as a developmental tool for poverty alleviation. With evidence from literature Morduch and Haley (2002) showed the positive impact of microfinance on first six MDGs. Khander (1998, 2001) showed microfinance had a positive impact on poverty reduction, women empowerment, improved school attendance for children and improvement in the children’s nutrition .

1.5.2 Definition of MSE

Recognising that the definition of MSEs varies from country to country, a few general definitions of MSE

relevant to this study are put forth. Parker et al. (1995) define micro enterprises as employing 1 to 5 works and

small enterprises 6 to 49 workers. McPherson (1996) and Mead and Liedholm (1998) defined MSEs as

enterprises undertaking income-generating activities other than primary production and employs 50 or fewer

workers. Home-based enterprises are included as long as at least half of the output is marketed. Within the

MSE category, microenterprises are those with ten or fewer workers; small enterprises range in size from 11 to

50.The European Commission (EC) defines small enterprises as enterprises which employ fewer than 50

persons and whose annual turnover or annual balance sheet total does not exceed 10 million euros. Micro

enterprises are defined as enterprises which employ fewer than 10 persons and whose annual turnover or

annual balance sheet total does not exceed 2 million euros. Despite the complexities and differences in the

definition of MSEs, it can be generally assumed that MSEs employ between 1 to 50 workers.

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17 1.4 Thesis’ Structure

This study is organised in six chapters as follows. Chapter 1 provides an introduction to the study. It looks at

microfinance from a global context through SSA perspective and into Ghana’s microfinance. It also addresses

the characteristics and challenges of MSEs and its interaction with MFIs. Chapter 2 provides a literature

review of the development of microfinance in Ghana through time and how it is structured. Chapter 3

addresses the methodology adapted for the study and its constraints used in the study. Chapter 4 provides a

summary statistical analysis of the survey results. Chapter 5 discussed the survey results in comparison to

previous research results and findings. Chapter 6 summaries findings and conclusions from the study and also

provides notes on the limitations of the study and recommendations for further research

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CHAPTER 2 THEORY

1.1 Critical Analysis of the Impact of Microfinance

Microfinance can affect individuals, micro and small enterprise (MSEs) in a variety of ways. Microfinance increases the income level of individuals, empowers women, improves education of client’s children, and increases access to social amenities among others. Lack of access to credit facilities is one of the major reasons why many people in developing countries remain poor. Since the introduction of microfinance programmes in the late 1970s, there has been increasing access to small loans by the poor in developing economies. A survey conducted by Daley (2006) estimated that between 1997 and 2005, the number of microfinance institutions increased from 618 to 3,133 and the number of borrowers increased from 13.5 million to 113.3 million during the same period, with 84% being women. The United Nations is of the view that microfinance can contribute significantly to the achievement of the United Nations MDGs which among others is aimed at halving extreme poverty by 2015. According to the Norwegian Noble Peace Prize committee, microfinance can help people to break out of poverty, which is envisaged as an important prerequisite to establishing long lasting peace. Mckernan (2002) showed borrowers of Grameen Bank had a 126% increase in self-employment profits after accounting for the direct benefit of access to capital. Although microfinance programs and institutions have become an important tool in reducing poverty or promoting micro and small enterprise development, knowledge about such initiatives is incomplete. Microfinance has been shown to positively impact an economy both socially and economically; and also been associated with some negative impacts. Between these positions are studies that contend microfinance has positive impacts but does not assist the poorest of the poor as claimed by Hulme(1997) and Hulmeand Mosley(1997).

Women are known to form majority stakeholders in most self-employment MSEs in developing countries and are confronted with a myriad of challenges. Microfinance has been instrumental in addressing issues of gender inequality and women empowerment in developing countries. A recent study showed that 80% of the clientele of the thirty-four largest micro lenders are women (Moody, 2002).Hashemi et al. (1996) showed that each year of membership in Grameen Bank and BRAC (Bangladesh Rural Advancement Committee, formerly called Bangladesh Rehabilitation Assistance Committee) 16% female are likely to be empowered. They measured the empowerment of women as a function of the length of time the women participated in Grameen and BRAC programmes. According to Hashemi et al. (1996)even women who did not participate were more than twice as likely to be empowered by virtue of the fact that they lived in Grameen villages. The authors demonstratedMFIs have positive impact on women empowerment. A woman was considered empowered by scoring five out of the eight measures below: mobility, economic security, ability to make small purchases, ability to make larger purchases, involvement in major household decisions, relative freedom from domination within the family, political and legal awareness, and involvement in political campaigning and protests. Their studies also measured women empowerment in Ghana and Bolivia. The study showed a limited positive impact in Ghana. In Bolivia, participants of the MFIs scored higher on the measures than residents of comparison communities.

Armendariz and Morduch (2006) contend that the role of microfinance is to reinforce transformations that

started in women long before the advent of microfinance rather than to initiate them. In 1970, women in

Bangladesh had no time for extra work because of the large numbers of children (an average of seven) per

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19 woman. Fertility in Bangladesh reduced to nearly three children per woman by 2000 suggesting that women in Bangladesh now have more time and resources for self-employment. Brau et al. (2009) revealed that in Guatemala as well as elsewhere, women who were empowered by participating in the MFIs were more able to exercise agency, have greater access to resources, experienced reduced marital subordination, increased assertiveness, representation and participation in family decision-making, more control over household incomes and assets. Findings by Cheston andKuhn (2002),through impact studies with Sinapi Aba Trust (SAT) in Ghana on women empowerment showed that through SAT’s program, women participants had a significant increase in their working capital which is particularly important for women empowerment. Increase in working capital gives women greater opportunity and control over their businesses and their lives.

The poor have benefited from MFIs in a number of ways. There have been significant growing levels of health care and education expenditures, increase in income levels, better quality of nutrition, and access to water among others. Some of these benefits and impact vary across different geographical, socioeconomic and cultural contexts. Microfinance is flaunted as an income-generating establishment for the poor in every society but some studies do not fully support this argument. For instance, studies of SEWA Bank in India, Zambuko in Zimbabwe and Mibanco in Peru sponsored by the United States Agency for International Development (USAID), found that on average borrowers had net income gains only in India and Peru. In Zimbabwe there were no measurable increases in average incomes relative to those in control groups (Armendariz and Morduch, 2006). Their studies showed that the impact of microfinance might not be the same across board. Some clients of microfinance will thrive, others will not see any impact, and some others may lose their footing. A study of Bancosol in Bolivia reported that in a given group approximately 25%

showed impressive gains to borrowing, 60-65% remained unchanged, and 10-15% went bankrupt (Armendariz and Morduch, 2006). Other studies have also shown that households that access microfinance facilities were already richer without microfinance programs. Coleman (2002) reported in his examination of village banks in Northern Thailand that households that were not microfinance borrowers and are significantly wealthier before the village bank started its operations were more likely to use their influence to obtain much larger loans from the village banks than others. Hashemi (1997) found that non-borrowers of Grameen Bank in Bangladesh chose not to participate because they felt they could not generate adequate profits to reliably repay loans.

2.2 A Review of Microfinance in Ghana 2.2.1 The Macroeconomic Context of Ghana

Based on World Bank’s estimates of gross national income (GNI) per capita for the previous year, Ghana crossed over from low-income country to a low middle-income country in July 2011. This has resulted from years of strong economic performance. With the exception of 2009, Ghana’s real GDP has been over 5% since 2003(Table 1andFigure 1), and it is projected to be fastest growing economy in SSA for 2011 at 13-14%

estimated growth rate(World Bank, 2011a).In 2010, Ghana’s population was 24.4million with 49% being female, and 48.5% rural population (56% in 2000). The population of the capital Accra is 2.3million and constitutes 18% of urban population. Ghana’s GDP per capita was $1283 compare to SSA at $1286, GDP annual growth rate was 6.6%, which is higher than the 4.8% for SSA, and GNI per capita was $1,230 which is close to $1,176 for SSA(World Bank, 2011b). Ghana’s poverty headcount ratio at $1.25 a day (PPP) (% of population) was 28.5% in 2006 compare 51% for SSA in 2005(United Nations, 2011; World Bank, 2011b).

2010 GDP at current market prices was $46.2billion with sectorial contribution to GDP being agriculture

29.9%, Industry18.6% and services 51.4%. Consumer price inflation was 10.8% for 2010 (GSS

2011).Inflation has been fluctuating in the last decade, peaking at 32.9% in 2001 and becoming less erratic

between 2004 and 2007 at 12.6 and 10.7 respectively, and then rising again due to global financial crisis in

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20 2008 and declining to 10.7 in 2010(Table 1andFigure 1). The Bank of Ghana policy rate, 91-day Treasury bill and Treasury notes have been declining from the start of the decade to a low of about 10-13% before the global financial crisis and have reverted to these rates after the global financial crisis (Table 1andFigure 1). . Integration of poverty reduction in Ghana’s national development policy frameworks had been implicit in the Ghana Vision 2020: The First Step (1996-2000); the First Medium-Term Plan (1997- 2000); but more explicit with the inclusion of the MDGs in the Ghana Poverty Reduction Strategy (GPRS I-2003-2005); the Growth and Poverty Reduction Strategy (GPRS II-2006-2009), Ghana Shared Growth and Development Agenda (GSGDA-2010-2013). Consequently, the proportion of the population living under $1/day declined from 51.7% in 1991/92 to 39.1% in 1998 to 28.5% in 2006. Ghana is expected to reach its 2015 poverty reduction target of 25.8% (Ghana Millennium Development Goals Report, 2006 and 2008). Coupled with the implementation of the national development programmes, are promulgation of legal and regulatory frameworks that have facilitated the recognition and development different categories of MFIs, both formal and informal. The 1993 PNDC Law 328 allowed for the registration of non-bank financial institutions.

Ghana’s major exports are cocoa and gold. Though Ghana is the world 3

^rd

largest cocoa producer and exporter; as well as Africa’s 2

^nd

largest gold producer and the world 8

^th

largest, its reliance on these few commodities makes it vulnerable to commodity price changes and the associated global political and economic ramblings. With the discovery of petroleum offshore Ghana in 2007 and production from the Jubilee field in 2010, petroleum revenue will help to sustain Ghana economic growth to a high middle-income country. The Jubilee field with 490 million barrels of booked oil reserve and about 800 billion cubic of gas resource is estimated to have production capacity of 120,000 barrels of oil per day in Phase 1 development programme(Tullow Oil, 2010). According to the World Bank (2009), production from the Jubilee field with its estimated reserve of 490million barrels at a price of US$75 per barrel could result in US$1.0billionper year in additional government revenue between 2011 and 2029. With the additional petroleum resources expected after appraisal and development of the following discoveries: Dum (oil discovery – 2008), Mahogany (oil discovery - 2008), Sankofa (gas discovery - 2009), Tweneboa (oil and gas condensate discovery - 2009), Dzata (oil discovery -2010), Akasa (oil field 2011), Banda (oil discovery - 2011), Enyenra (oil discovery - 2010), Gye Nyame (gas condensate discovery - 2011), Ntomme (oil discovery - 2011), Teak (oil and gas condensate discovery - 2011), and Tweneboa Deep (oil discovery – 2011), Ghana will have access to increased oil revenues for its development programmes. It will also create additional developmental opportunities such employment, export diversification, upstream and downstream industry and capacity development, and additional revenues for budgetary stabilization and support.

Ghanaians today are partly shielded from the effects of hikes in global fuel prices. Attempts by the government of Ghana (GOG) through the National Petroleum Authority (NPA) to remove fuel subsidies resulted in a threat of a general strike by the Trade Unions Congress (TUC)

¹

of Ghana. According to the NPA, fuel subsidies cost the country GH¢

²

450 million (US$300 million) in 2011. The removal would have resulted in a 15-30% increase in the prices of petrol (15%), diesel (15%) and liquefies petroleum gas (LPG)–(30%).

After negotiations between the GOG and the TUC, the GOG decided to reduce the 15% price hike by 20% to 12%(GhanaWeb, 2011; GhanaWeb, 2012b). The recent increase in the daily minimum wage by 20% to GH¢4.48 (US$ 2.99) in February 2012 adds to the government’s already high public expenditure(GhanaWeb, 2012a).

1

TUC (Ghana) is the umbrella organisation of 18 national labour unions in Ghana. It is non-political and has a membership of about 500,000 and it is the largest and most prominent organisation for unionised labour in Ghana. They deal and negotiate with

2

GH¢Ghana cedis (1.5 GH¢= 1US$)

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21 Ghana joined the International Development Association (IDA) and IMF’s heavily indebted poor countries (HIPC) initiative in 2001 due to unsustainable debt servicing and external vulnerability. Ghana’s pre-HIPC public external debt as at end-December 2000 was US$5.9 billion in nominal terms and in NPV

³

terms was US$3.8 billion, equivalent to about 558% of government revenues, about 152% of exports of goods and nonfactor services, and about 77% of GDP(IMF and IDA, 2001).Debt relief under HIPC and Multilateral Debt Relief Initiative (MDRI) in 2006 led to a marked decrease in the external debt to US$2.2 billion. From 2006, public external debt has increased to US$ 7.1 billion in nominal terms as of September 2011 and close to 20%

of GDP; thereby exceeding the pre-HIPC level (MoFEP-Ghana, 2011). Ghana reached the HIPC completion point in 2004 and expects to get up to US$3.5 billion in nominal terms of total debt relief under the enhanced HIPC Initiative from its creditors and development partners; and also provide annual debt servicing savings of US$230 million between 2004 and 2013(World Bank, 2005).The purpose of the HIPC initiative was to help Ghana out of the unsustainable debt burden and to use the savings from the initiative in addition to other investment and development aids for investment in education, health, infrastructure, and social services which will ultimately reduce the poverty levels. Economic growth has been linked to the recent declines in poverty levels in Ghana. Therefore, concerns about recent increasing public external debt are being raised. The GOG signed a string of concessionary loans with China in September 2010; some of which are the largest in Ghana’s history. This includes US$ 10.4 billion concessionary loan agreement with Exim Bank of China for the development of the railways system in Northern Ghana, energy infrastructure, education and sanitation among others, and the eastern corridor roads. Additionally, US$ 3billion loan agreement was signed with the China Development Bank for infrastructural development and job creation in oil and gas sector. The Other loans are a US$260 million for the expansion of the Kpong Water Works and US$150 million for the e- governance project in Ghana(GOG, 2010a; GOG, 2010b). These are just few instances of recent loans signed.

Many other loan agreements have been signed and awaiting ratification by the Parliament of Ghana. These ballooning public debts, if invested and managed properly, could have long-term positive developmental impact for Ghana; otherwise it could have debilitating effect on Ghana’s economy and poverty alleviation.

The passage of the Ghana Petroleum Revenue Management Act 2011 (Act 815)is to help Ghana manage its petroleum revenues. The purpose of the law is to provide a framework for the collection, allocation and management of petroleum revenue in a responsible, transparent, accountable and sustainable manner. The law provides for the creation of the Petroleum Holding Fund (PHF) and the Ghana Petroleum Fund (GPF) that comprises the Stabilization Fund and the Heritage Fund. The PHF will receive and disburse petroleum revenues; up to 70% of which could be spent as part of the government’s annual budget (Annual Budget Funding Amount) and the remainder transferred to the GPF in a ratio set by parliament. The objective of the Stabilization Fund is for the smoothening and sustainability of public expenditure capacity against unanticipated petroleum revenue shortfalls; while the Heritage Fund is an endowment fund to be invested for future generations. 10 years’ worth of the Annual Budget Funding Amount from the commencement of the law could be used as collateral for government loans and liabilities. If not managed prudently, the rising debt burden, the collateralisation of the up to 70% of petroleum revenues and large fiscal deficits could create enormous development challenges for poverty alleviation and, attainment and sustainability of the MDGs.

3

Net Present Value

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22 Table 1: Selected Economic Indicators of Ghana 1999-2010

Source: Bank of Ghana

Figure 1: Graph of Selected economic indicators of Ghana 1999-2010

2.2.2 The Structure and Characteristics of Microfinance in Ghana

The BOG supervises and regulates all activities within the financial sector under the following legal, legislative and regulatory frameworks. 2004 Banking Act (673), 2006ARB Apex Bank Ltd. Regulations, L.I.

1825 (Act 774), 2007 Credit Reporting Act (726), 2007 Banking (Amendment) Act (738), 2008 Borrowers and Lenders Act (773), 2008Home Mortgage Finance Act (770) and 2008Non-Bank Financial Institutions (NBFI) Act (774). The 2008NBFIAct is the main law governing non-banking and microfinance activities in Ghana. The Act specifies non-bank financial services as including leasing operations, money lending operations, money transfer services, mortgage finance operations, non-deposit-taking microfinance services, credit union operations and any other activities designated by the BOG. Ghana’s microfinance sector has evolved into a 4-level multi-tiered structure with regulatory and prudential supervision by the Bank of Ghana (Figure 2).The 4-level tiered MFI structure (Figure 2, refer to Appendix A3) is described below:

x Tier 1: Rural and Community Banks (RCBs); NBFIs and other financial intermediaries – [Finance Houses (FIHs) and Savings and Loans Companies (SLCs)]

⁴

.

x Tier 2: Deposit-taking organisations –Susu Companies (SUCs) and Microfinance companies (MICs);

Financial Non-Governmental Organizations (FNGOs); Credit Unions (CUs).

4

Non-depositing-taking non-bank financial services included in the NBFI law are not part of Ghana’s microfinance structural framework:

Finance and Leasing Companies (FLCs), Mortgage Finance Companies (MFCs), Leasing Companies (LSCs), Credit Reference Bureaus (CFBs) and Money Transfer Companies (MTCs)

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Real GDP Growth % 4.4 3.7 4.2 4.5 5.2 5.8 5.8 6.2 6.5 8.4 4.0 7.7

Inflation (Annual Average) 12.4 25.2 32.9 14.8 26.7 12.6 15.2 10.9 10.7 16.5 19.3 10.7

Bank of Ghana policy rate 24.5 21.5 18.5 15.5 12.5 13.5 17.0 18.0 13.5

91-day treasury bill 31.5 42.0 28.9 26.6 18.7 17.1 11.5 10.2 10.6 24.7 22.5 12.3

1-year treasury note 22.3 31.0 29.9 27.0 20.5 17.9 16.5 15.0 12.3 20.0 20.0 12.7

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23 x Tier 3: Non-deposit taking organisations –Moneylenders (MLs); Financial Non-Governmental

Organizations (FNGOs).

x Tier 4: Individual Susu collectors and enterprises (ISCEs); Individual moneylenders and enterprises (IMLEs).

In the case of CUs, CUA undertakes the regulation and supervision of CUs on behalf of the BOG. The semi- formal category comprising Individual Money Lenders and enterprises (IMLEs) and Individual Susu Collectors and Enterprises (ISCEs) are regulated by the umbrella organisations: Money Lenders Association of Ghana (MLAG) and the Ghana Cooperative Susu Collectors Association (GCSCA). The Apex bodies that work to support the BOG with the regulation and supervision of MFIs are as follows:

x Association of Rural Banks (ARB)/ARB Apex Bank responsible for RCBs

x Ghana Microfinance Institutions Network (GHAMFIN), a network of MFI apex bodies x Association of Financial NGOs (ASSFIN) responsible for FNGOs

x Ghana Association of Savings and Loans Companies (GHASALC) responsible for savings and loans companies

x Ghana Cooperative Credit Unions Association (CUA)responsible for credit unions

x Ghana Cooperative Susu Collectors Association (GCSCA) responsible for Individual Susu Collectors and Enterprises (ISCEs), Susu Companies (SUCs)

x Money Lenders Association of Ghana (MLAG) responsible for Individual Money Lenders and enterprises (IMLEs) and Money Lenders Companies (MLCs)

x Ghana Association of Microfinance Companies (GAMC) responsible for microfinance companies providing deposit and loans services.

Figure 2: Structure of MFIs in Ghana

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24 Key supporting institutions include Microfinance and Small Loans Centre (MASLOC) and Ghana Microfinance Institutions Network (GHAMFIN). Established in 2006, MASLOC is a microfinance apex body responsible for implementing the Government of Ghana’s (GOG) microfinance programmes targeted at reducing poverty, creating jobs and wealth. MASLOC also disburses micro and small loans to the identified poor in the various sectors of the Ghanaian economy; provides business advisory services, training and capacity building for small and medium scale enterprises (SMEs). GHAMFIN, established in 1998, has grown from an informal network of institutions and individuals who operate MFI within Ghana’s Microfinance sector to a network organisation for the MFI Apex bodies in Ghana. Its members are members of the Apex bodies which include institutions of different sizes and legal structures comprising DMBs, SLCs, FNGOs, RCBs, Susu collectors, clubs and companies, and cooperatives. GHAMFIN regularly collaborates with government and donor organizations in Ghana, particularly in the area of policy change activities and implementation of capacity building and institutional strengthening programs e.g., MicroStart (UNDP/AfDB), and the Social Investment Fund.

In 2003, there were 115 RCBs with over a million recorded depositors and about 150,000 loan accounts (some of them groups of 5 to 35 members), 253 credit unions with over 120,000 members, and 9 SLCs with more than 160,000 depositors and 10,000 borrowers. Some 50 NGO MFIs reach a total of about 60,000 borrowers, but most of these (as well as smaller community-based organizations) have fewer than 1,000 clients each (Gallardo et al., 2005). Currently there are 26 DMBs, 135 RCBs, 433 CUs, 53 NBFIs (including 25 FIHs and 19 SLCs), 1462 Susu operators and 338 MICs. A potential estimate of the number of MFI clientele base in Ghana could be close to 4 million at present. Analysis of the distribution of the characteristics of CUs across the 10 regions of Ghana reveals the following. According data from CUA (2010), of the 433 CUs in Ghana as of 2010, 37% are located in the Greater Region

⁵

(see Appendix A2) with the Upper East and Upper West regions accounting for only 3% each (Table 2 and Figure 4). The three different categories of CUs namely community, parish and work-based are about evenly spread at 34%, 32% and 34% respectively (Figure 3).Based on its cumulative data as of 2010, the total CU membership stood at 336,137 with 134,037 borrowers; and GH¢175,999,293 (US$117,332,862) and GH¢279,880,700 (US$ 186,587,133) in deposits and total assets respectively (Table 3 and Table 5). The CU savings as of June 2010 (Table 4 and Table 5) wasGH¢162,788,510 (US$ 108,525,673), shares GH¢13, 210, 783(US$ 8807189), loan granted GH¢109,913,183(US$ 73,275,455), loan repaid GH¢63,367,066(US$ 42,244,711), and outstanding loans GH¢103,881, 407(US$ 69,254,271).

Membership in CUA involves individual and groups. Groups account for 4% and 2% of members and borrowers respectively. Men constitute a little over half of the CU membership, borrowers, contributors to savings, shares and deposits and loan requests (Table 5 and Figure 6). Though the Greater Accra region has the highest number of CUs and about twice the number of CUs as the Ashanti Region, the latter has the largest membership size (Figure 4 and Figure 5). The Ashanti and Greater Accra region which have the two largest cities of Ghana (Accra and Kumasi), account for about 46% of total membership and close to half of total deposits, savings, total assets and granted loans (Table 4, Figure 8 and Figure 9). 43% (σ

⁶

= 13%) of the CU membership are borrowers (Figure 11), and the average number of borrowers per CU is 371 (σ = 184) while average number of members per CU is 896 (σ = 414).Despite the largest membership in Ashanti and Greater Accra regions, the Western region has the largest average membership per CU followed by the Upper West

5

The 10 region in Ghana – Greater Accra (which has both the capital city Accra and the harbour and industrial city of Tema), Central, Eastern, Western, Ashanti, Volta, Brong Ahafo, Northern, Upper East and Upper West Regions.

6

Standard deviation

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25 region. The Western region also has the largest average number of borrowers per CU followed by the Central region (Table 6 and Figure 7). Average loan per borrower is GH¢805 (US$ 537) [σ = GH¢196], average deposit (shares + savings) per member is GH¢506 (US$ 337) [σ = GH¢132], average ratio of loans granted to deposit is 68% (σ = 17%) and average ratio of loans granted to total assets is 41 %( σ = 10%). Greater Accra region has the largest average loan size per borrower followed by Upper West and the Northern regions . The Central region has the largest average deposit per member followed by the Eastern and the Greater Accra regions ( Table 6, Figure 10andFigure 11). Granted loans as a fraction of deposits exceeds 50% for 8 of the 10 region with the Upper West region have the highest portion. The Upper West region also has the highest granted loans as a fraction of total assets (Table 6 and Figure 11).

Table 2: Regional distribution of CUs in Ghana

Region Number %

Greater A. 159 37%

Ashanti 76 18%

Central 36 8%

Brong Ahafo 35 8%

Eastern 35 8%

Western 26 6%

Northern 20 5%

Volta 20 5%

Upper E 14 3%

Upper W 12 3%

Total 433 100%

Source: CUA 2010

Figure 3: Distribution of CUs in Ghana by category

Table 3: CU Membership, Deposits, Assets and Loans distribution by the 10 regions of Ghana

Source: CUA 2010*1.5GH¢=1US$

CUs Membership Borrowers Deposits(GHS) Total Assets(GHS) G. Accra R. 159 76,478 29,244 47,975,152 68,548,144 Ashanti R. 76 79,825 21,263 38,234,180 56,898,317 Brong R. 35 41,167 15,330 17,764,896 29,222,852 Central R. 36 27,651 18,270 20,100,453 34,822,360 Eastern R. 35 15,508 8,543 10,696,807 19,220,340 Northern R. 20 12,817 3,547 4,445,249 7,331,004 Upper East R. 14 5,658 2,890 2,680,910 4,637,565 Upper West R. 12 18,699 4,991 5,594,619 9,275,172 Volta R. 20 17,251 9,319 8,641,593 14,391,124 Western R. 26 41,083 20,640 19,865,434 35,533,822

433 336,137 134,037 175,999,293 279,880,700

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26 Table 4: Distribution of CU Savings, Shares and Loans by regions in Ghana

*Out. Loans – Outstanding Loans.1.5GH¢=1US$ Source: CUA 2010

Table 5: Distribution of CU Memberships, Deposits, Assets and Loans by sex and type

1.5GH¢=1US$ Source: CUA 2010

Table 6: Regional distribution of membership, average loan and deposit ratios

*Bo/Meb – Ratio of Borrowers to members; AvgBo/CU – average borrowers per CU, AvgMeb/CU - Average members per CU;

AvgLoan/Bo (GH¢); AvgReloan/Bo (GH¢) - Average loan granted per borrower; AvgDep/Meb(GH¢) - Average deposit per member (Deposit = Savings + Shares); LoanG/Dep-Ratio of Loans granted to deposits %; LoanG/TotA –Ratio of Loans granted to total assets %

*1.5GH¢=1US$ Source: CUA 2010

CUs Savings (GHS) Shares (GHS) Out. Loans (GHS) Loans Granted(GHS) Loans Repaid(GHS) G. Accra R. 159 44,187,007 3,788,145 20,572,992 31,768,624 13,439,485 Ashanti R. 76 34,970,520 3,263,660 18,664,137 15,689,575 12,691,776 Brong R. 35 16,620,251 1,144,645 11,457,956 13,435,126 7,863,768 Central R. 36 18,851,773 1,248,680 14,721,907 11,209,948 8,627,704 Eastern R. 35 10,079,095 617,712 8,523,533 5,448,742 3,057,029 Northern R. 20 4,020,719 424,530 2,885,755 3,621,250 1,878,518 Upper East R. 14 2,444,553 236,357 1,956,655 2,261,752 1,320,757 Upper West R. 12 5,152,681 441,938 3,680,553 5,097,091 2,189,613 Volta R. 20 8,097,700 543,893 5,749,531 4,088,189 2,923,626 Western R. 26 18,364,211 1,501,223 15,668,388 17,292,886 9,374,790

433 162,788,510 13,210,783 103,881,407 109,913,183 63,367,066

Female Male Groups Total Female Male Groups Total Membership 141,648 182,719 11,770 336,137 42% 54% 4% 100%

Borrowers 55,822 75,470 2,745 134,037 42% 56% 2% 100%

Savings(GHC) 61,630,882 95,687,749 5,469,879 162,788,510 38% 59% 3% 100%

Shares(GHC) 5,295,719 7,452,773 462,291 13,210,783 40% 56% 3% 100%

Out. Loans(GHC) 38,212,274 62,722,947 2,946,186 103,881,407 37% 60% 3% 100%

Deposits(GHC) 66,926,601 103,140,522 5,932,170 175,999,293 38% 59% 3% 100%

Total Assets(GHC) 105,138,875 165,863,469 8,878,356 279,880,700 38% 59% 3% 100%

CUs

Bo/Meb

(%) AvgBo/CU AvgMeb/CU Avgloan/Bo AvgReloan/Bo AvgDep/Meb LoanG/Dep LoanG/TotA G. Accra R. 159 38% 184 481 1,086.33 459.56 627.31 66% 46%

Ashanti R. 76 27% 280 1,050 737.88 596.89 478.98 41% 28%

Brong R. 35 37% 438 1,176 876.39 512.97 431.53 76% 46%

Central R. 36 66% 508 768 613.57 472.23 726.93 56% 32%

Eastern R. 35 55% 244 443 637.80 357.84 689.76 51% 28%

Northern R. 20 28% 177 641 1,020.93 529.61 346.82 81% 49%

Upper East R. 14 51% 206 404 782.61 457.01 473.83 84% 49%

Upper West R. 12 27% 416 1,558 1,021.26 438.71 299.19 91% 55%

Volta R. 20 54% 466 863 438.69 313.73 500.93 47% 28%

Western R. 26 50% 794 1,580 837.83 454.20 483.54 87% 49%

433 43% 371 896 805.33 459.28 505.88 68% 41%

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27 Source: CUA 2010

Figure 4: Regional Distribution of CUs in Ghana

Source: CUA 2010

Figure 5: Regional distribution of CU borrowers and members

Source: CUA 2010

Figure 6: Assets, deposit, loans, savings, borrowers and member distribution by sex and type